HUD - Office of Public Housing

Below is a raw (and likely hideous) rendition of the
original report.
(PDF)

Issue Date
February 18, 2010
Audit Report Number
2010-BO-0001
TO: Donald Lavoy, Acting Deputy Assistant Secretary for Office of Field Operations, PQ
Donna Ayala Director, Office of Public Housing, Boston Hub, 1APH
Henry S. Czauski, Acting Director, Office of the Departmental Enforcement Center, EC
FROM:
John A. Dvorak, Regional Inspector General for Audit, Region 1, 1AGA
SUBJECT: HUD Was Not Effective in Recovering the New London Housing Authority From
Troubled Status and Did Not Take the Required Regulatory or Statutory Action
HIGHLIGHTS
What We Audited and Why
We initiated the audit of the U.S. Department of Housing and Urban
Development’s (HUD) efforts to recover the City of New London, CT, Housing
Authority (Authority) due to its longstanding troubled status. The Authority has
had significant management deficiencies for more than 10 years, and HUD
identified the Authority as “overall troubled” in May of 2004. Our objective for
this audit was to evaluate HUD’s effectiveness in identifying and helping to
correct deficiencies at the Authority.1
1
We also recently completed an audit of the Authority’s Public Housing Capital Fund program, which found that
the Authority did not properly administer its capital funds (report number 2009-BO-1010).
1
What We Found
HUD had detected significant deficiencies but had not been effective in
recovering the Authority from its longstanding troubled status. Although HUD
provided extensive technical and monetary assistance and entered into a number
of binding memorandums of agreement requiring improvement, the Authority’s
condition continued to decline, it could not meet its debt obligations, and it
remained troubled. The Authority has been troubled primarily due to the poor
management of its Federal and State housing programs. In addition, its Federal
housing projects did not meet HUD’s minimum housing standards.
HUD failed to take action in a timely manner when the Authority failed to make
substantial progress in correcting its deficiencies. As a result, the Authority’s
financial condition declined, creditors were not paid, liens were placed on its
housing projects, and its rent receipts may be placed in receivership unless more
than $1.7 million in unpaid utility bills is paid by January 2010. In addition, the
Authority improperly used more than $524,000 in Federal funds for State
programs, $105,000 for unsupported payments in lieu of taxes, $99,000 in Federal
capital funds for State security patrols, and $97,000 for unsupported and
unreasonable renovations and painting.
What We Recommend
We recommend that the Director of HUD’s Boston Office of Public Housing
ensure that the Authority (1) establishes and implements a financial/business plan
to pay its creditors, avoid having a local receivership lien placed against its rents ,
and remove liens; (2) enters into an agreement to repay more than $900,000 in
water and sewer bills; (3) properly accounts for its revolving account, stops using
Federal funds for State programs, and repays its Federal programs an estimated
$524,879; (4) repays or supports $97,106 paid for unreasonable and unsupported
contract maintenance costs; and (5) repays or supports $99,939 in Federal funds
paid for State security patrols.
We recommend that the Director of the Office of Field Operations (1) implements
a formal process to report troubled housing agencies to the Assistant Secretary for
Public Housing for a determination of the corrective actions required by HUD
regulations and Federal statutes and (2) notifies the Deputy Assistant Secretary
for Public Housing that the Authority is in danger of having a local receivership
lien placed against its rents.
2
We recommend that the Director of the Departmental Enforcement Center pursue all
administrative and/or civil monetary penalties for the regulatory agreement
violations disclosed in this finding.2
In addition, the Authority has exceeded the maximum statutory recovery period,
and our prior audit report number 2009-BO-1010, issued August 7, 2009,
recommended that the Deputy Assistant Secretary for Field Operations inform the
Assistant Secretary for Public and Indian Housing of the Authority’s inability to
improve its score or meet the goals of the memorandum of agreement with HUD
and determine the statutory remedies required under section 6(j) of the U.S.
Housing Act of 1937. Therefore, the findings in this report should also be
considered when implementing that recommendation.
For each recommendation in the body of the report without a management
decision, please respond and provide status reports in accordance with HUD
Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or
directives issued because of the audit.
Auditee’s Response
We provided the Deputy Assistant Secretary for Field Operations, the Director of
the Boston Office of Public Housing, and the Acting Director of the Departmental
Enforcement Center with a draft audit report on December 10, 2009, and
requested a response by January 21, 2010. We held an exit conference with HUD
officials on December 22, 2009, to discuss the draft report. The Boston Public
Housing Director coordinated with the Office of Field Operations and provided
HUD’s written comments on January 21, 2010.
The complete text of the auditee’s and HUD’s responses, along with our
evaluation of these responses, can be found in appendix B of this report.
2
In implementing this recommendation, the Deputy Director should consider all of the issues discussed in this
report and audit report 2009-BO-1010.
3
TABLE OF CONTENTS
Background and Objective 5
Results of Audit
Finding 1: HUD Was Ineffective in Recovering the Authority From Troubled 7
Status and Did Not Take the Required Regulatory or Statutory Action
Scope and Methodology 16
Internal Controls 17
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 18
B. Auditee Comments and OIG’s Evaluation 19
C. Authority PHAS Scores 27
4
BACKGROUND AND OBJECTIVE
The City of New London, CT, Housing Authority (Authority) provides low-income public
housing for qualified individuals under an annual contributions contract with the U.S.
Department of Housing and Urban Development (HUD). The Authority has contracted with
HUD for financial assistance pursuant to the United States Housing Act of 1937, as amended,
and the State of Connecticut, Department of Economic and Community Development, for
financial assistance for elderly housing projects in the form of capital grants and/or loans. The
contractual obligations of the Authority under sections 4 and 5 of the annual contributions
contract are “to provide decent, safe and sanitary housing for eligible families in a manner that
promotes serviceability, economy, efficiency, and stability of the projects and the economic
social well-being of the tenants.” Section 5 states, “the HA [housing agency] shall develop and
operate all projects covered by this ACC [annual contributions contract] in compliance with all
the provisions of this ACC and all applicable statutes, executive orders, and regulations issued
by HUD.”3 The Authority administers approximately 838 housing units (331 Federal housing
units and 507 State housing units). During 2007,4 the Authority received more than $4.6 million
to operate its housing programs as follows:
• $2.13 million from its State programs,
• $1.45 million from its low-income public housing program,
• $ .86 million from its Section 8 Housing Choice Voucher program, and
• $ .18 million from its Public Housing Capital Fund program.
The State program units are two-thirds of the Authority’s portfolio, and HUD has no oversight of
these State programs, nor does it have responsibility for the continued operations of State
programs. HUD only has control over and responsibility for the overall financial health of this
agency as it relates to federally funded programs. However, the Authority has had significant
deficiencies regarding federally funded programs for more than 10 years and has been operating
under a memorandum of agreement with HUD’s Troubled Agency Recovery Center/Recovery
Prevention Corps (Corps) since 1998. HUD identified the Authority as “overall troubled” in
May 2004.
The Corps is organized under the Office of the Deputy Assistant Secretary for Field Operations.
The Corps’s mission is to support the Office of Public Housing field offices to prevent at-risk
housing authorities from becoming troubled and facilitate their recovery from troubled status.
The Corps executes this mission by providing technical assistance, training, and consulting
services to hubs/program centers and troubled housing agencies. The Corps had been primarily
responsible for the Authority’s recovery until August 5, 2003. In 2003, the Director of HUD’s
Boston Office of Public Housing became responsible for monitoring, oversight, and recovery of
“troubled” public housing agencies in its area and ensuring that agencies that did not recover
3
In addition, all other pertinent sections of the annual contributions contract that are applicable to the Authority’s
administration of HUD funds, including but not limited to section 6 – Cooperation Agreement; section 7 – Covenant
Against Disposition and Encumbrances; section 8 – Declaration of Trust; section 10 – Pooling of Funds; and section
15 – Books of Account, Records, and Government Access
4
Its last audited financial statements
5
within 2 years were either referred to the Departmental Enforcement Center and declared in
substantial default 5 or referred to the Assistant Secretary for a determination of whether to
pursue receivership of all or part of the public housing agency under section 6(j)(3) of the United
States Housing Act.
The Office of Field Operations oversees the Director of the Office of Public Housing and the
Corps.
The Assistant Secretary for Public Housing overseas the Office of Field Operations and is
responsible under HUD’s delegation of authority to issue a notice of substantial default or to
petition for a receiver when agencies do not meet the requirements of their annual contributions
contracts or memorandums of agreement, fail to make substantial progress toward remedying
their troubled status, and fail to recover from troubled status within the maximum recovery
period.
Our objective was to evaluate HUD’s effectiveness in identifying and helping to detect and
correct deficiencies at the Authority.
5
As required by 24 CFR (Code of Federal Regulations) 902.75(b) and (g) and 902.79 - Final Rule
6
RESULTS OF AUDIT
Finding 1: HUD Was Ineffective in Recovering the Authority From
Troubled Status and Did Not Take the Required Regulatory or Statutory
Action
Over the past 10 years, HUD had not been effective in recovering the Authority from its
longstanding troubled status. Although HUD provided extensive technical and monetary
assistance, the Authority’s condition continued to decline. It could not meet its debt obligations
and remained troubled. The Authority was troubled due to the poor management of its Federal
and State housing programs as evidenced by its improperly awarding and administering
contracts, high vacancy rates, low rent collection rates, and insufficient State rents to fund
operations. In addition, the Authority’s Federal housing projects did not meet HUD’s minimum
housing standards.
HUD did not take timely action when the Authority’s board of commissioners and executive
directors failed to make substantial progress to correct its deficiencies. As a result, the
Authority’s financial condition continued to decline, creditors were not paid, liens were placed
on its housing projects, and projects’ rents may be placed in receivership unless more than $1.7
million in utility bills is paid. In addition, the Authority used more than
• $524,000 in Federal funds for State programs,
• $105,000 for unsupported payments in lieu of taxes,6
• $ 99,000 in Federal capital funds for State security patrols, and
• $97,000 for unsupported and unreasonable renovations and painting.
The Authority Had
Longstanding Deficiencies
HUD first advised the Authority of its troubled status in 1998 and officially
designated it as an “overall troubled” agency in May of 2004 under HUD’s Public
Housing Assessment System (PHAS). The troubled status resulted primarily
from the Authority’s failing scores in the financial and physical components of
the PHAS. The failed score for the financial component indicated the Authority’s
inability to effectively manage and administer its housing program funds. Its
failed score for the physical component indicated that the general condition of the
6
A payment in lieu of taxes made to compensate a local government for some or all of the tax revenue that it loses
because of the nature of the ownership or use of a particular piece of real property. Usually it relates to the foregone
property tax revenue.
7
properties resulted in units’ not being safe, sanitary, and decent. Appendix C
provides a history of the Authority’s PHAS scores.
The Authority Failed To
Improve After HUD Provided
Substantial Technical and
Monetary Assistance
The Corps provided extensive technical assistance by telephone, e-mail, letters,
and hands-on assistance during on-site reviews. The hands-on assistance included
developing sample policies and procedures for the Authority to incorporate into
its operations. More than $830,000 was also provided for services that included
contracts to prepare the Authority’s annual and 5-year plans, increase
management proficiency and efficiency, improve housing structures, and evaluate
and improve tenant security.
Despite HUD’s assistance and a number of memorandums of agreement requiring
improvement, the Authority’s board of commissioners and executive directors
failed to substantially improve its performance, and it remained troubled. The
Authority was troubled primarily due to poor management, which was further
compounded by its diversion of Federal funds to its State housing program with
high vacancy rates, low rent collection rates, and insufficient rents to fund
operations. In addition, the Authority’s Federal housing projects failed three
physical inspections including its most recent physical housing inspection in
February of 2009. Although the Authority had made some progress toward
reducing vacancy rates, collecting rents, and reducing costs, it continued to
operate at a deficit and improperly used Federal funds to support its State
programs.
HUD Did Not Take the
Required Action in a Timely
Manner
The Authority’s failure to meet its memorandum of agreement requirements and
recover from troubled status within 2 years constituted a substantial default and
required the Director of the Boston Office of Public Housing to recommend to
HUD’s Assistant Secretary for Public and Indian Housing that the Authority be
declared in substantial default.
Federal regulations and statutes require the Assistant Secretary to take specific
actions when troubled agencies fail to meet their memorandum of agreement
requirements, substantially improve after 1 year, and recover from troubled status
within 2 years. These actions may not be delegated.
8
HUD officially designated the Authority as “overall troubled” on May 26, 2004,
when the Authority scored only 38 of 100 possible PHAS points for 2003. The
Authority achieved the required improvement in 2005, its first full year of
recovery. However, it scored only 40 points in 2006, its second year of recovery.
Thus, on December 12, 2007, the Authority should have been referred to the
Assistant Secretary for Public Housing, and the Assistant Secretary should have
either (1) declared the Authority in substantial default and referred it the
Departmental Enforcement Center or (2) taken possession of any or all of the
Authority’s projects or programs or initiate actions to appoint a receiver to assume
the responsibilities of the Secretary. Under a regulatory declaration of default,
HUD and the Authority could jointly manage operations after issuing the notice of
default. Further, the regulation does not contain a time limit for remedying the
agency problems, and the process may continue indefinitely.
Under the statutory provision, HUD would petition the court to appoint a receiver
for the Authority. The receiver would not manage the operations but, rather,
implement the statutory corrective actions to either sell the assets, divide the
agency into smaller entities, combine the agency with another nearby agency, or
sell the agency assets to a nonprofit. The statutory remedy results in the
reorganization of the entity in a short amount of time with limited HUD resources
being consumed.
The Authority’s Financial
Condition Continued To Decline
The Corps and the Boston region took some corrective action when they directed
the Authority to contract for the administration of its Section 8 program.
However, HUD did not declare the Authority in substantial default, appoint a
receiver, or take possession of the Authority’s public housing programs primarily
due to its decision not to employ scarce resources for a small housing authority.
In addition, HUD was reluctant to separate management of the Federal and State
programs due to the negative effect it would have had on the State programs.
Instead, the Director of the Boston Office of Public Housing issued another
directive for improvement that was not effective, as evidenced by the Authority’s
declining financial and physical condition.
Further, neither the Boston Public Housing Director nor the Deputy Assistant
Secretary for Field Operations formally referred the Authority to the Assistant
Secretary for corrective action, and the Authority was not declared in substantial
default or placed in receivership.
The Authority’s monthly board minutes provided to HUD showed that its bills
past due more than 30 days had increased steadily from $210,000 in January 2006
to more than $2.9 million in September 2009.7 This increasing failure to meet its
7
The $2.9 million was owed by the Authority’s State and Federal programs.
9
financial responsibilities clearly showed that the Authority’s financial condition
was not improving. The HUD Boston Office of Public Housing reported to
HUD’s Office of Field Operations that the Authority’s financial condition
continued to decline. The following graph shows the growth of accounts payable
past due more than 30 days.
$3,500,000
$3,000,000
$2,500,000
$2,000,000
Electricity and gas > 30 days past due
$1,500,000
$1,000,000 Water and sewer > 30 days past due
$500,000
Total payables > 30 days past due
$‐
In a March 29, 2009, letter, the HUD regional field office suggested that the
administration of all of the Authority’s Federal housing programs should be
contracted for, and the Authority’s board of commissioners agreed. HUD stated:
“Despite our efforts, the NLHA [Authority] has continued on a steady financial
decline, management practices have not improved, and the Authority has failed to
maintain acceptable physical conditions in its public housing portfolio. Based on
this extended history of poor performance and lack of improvement, we do not
believe that the Authority has the management capacity to successfully operate its
federal public housing programs in the best interests of its residents and HUD.
Consequently, we strongly urge the Board to contract out management of its low
rent public housing programs…”
The Federal Projects’ Rents
May Be Placed in Receivership
On January 23, 2009, the Connecticut Superior Court appointed an inactive
receiver of rents for the Authority’s housing projects and established the utility
company’s right to record liens on the projects for the estimated $1.7 million in
past-due bills. The inactive receivership was conditioned on full repayment by
January 2010. The potential liens and receivership of rents were prohibited by the
Authority’s contracts with HUD8 and would be detrimental to operating the
Federal housing projects. HUD was aware that some utility bills had not been
8
Annual contributions contract and declaration of trust
10
paid, and the Authority had entered into a repayment agreement. However, it did
not review the agreements and was not aware of the court-appointed receiver or
the large amount of unpaid Federal utility bills. HUD and the Authority started to
take action after we informed them of the potential receivership in September
2009. Although the Authority did not have the $818,000 owed to the utility
company for Federal projects, it expected to receive $3.1 million from the
redevelopment of its State housing projects starting in April 2010. Therefore, in
January 2010 if the utility company exercises its rights and invokes active
receivership, the Authority will lose the control and use of its rental income to pay
its operating expenses.
The Authority also failed to pay the City of New London (City) more than
$914,000 for water and sewer services. The City initiated a forbearance
agreement in November 2008 that would have required the Authority to pay its
current utility bills and an additional $5,000 per month until the debt was retired.
However, the Authority did not sign the agreement and made only two payments
during 2009 totaling $10,004. As a result, its Federal programs owed the City
more than $342,000 for unpaid water and sewer bills, and the City placed liens
against the Authority’s housing projects.
The Authority Lacked an
Adequate Plan To Repay Its
Creditors
The Authority did not have an adequate strategic or cash-flow plan for meeting its
short-term and long-term financial responsibilities. For the short term, each week
the Authority prioritized its bills and paid as many as possible. For the long term,
the Authority expected to receive around $2.1 million from redeveloping its State
properties in February 2010. However, the $2.1 million, if received, would not be
enough to repay the more than $3.7 million required to bring its Federal and State
payables current.
The Authority Used More Than
$500,000 in Federal Funds for
State Programs
The Authority’s annual contributions contract with HUD prohibits using low-
income public housing funds for other programs. However, the Authority
reported in its financial statements that it used Federal funds for its State housing
programs, with more than $224,000 used in 2006 increasing to more than
$524,000 by the end of 2007. However, we were unable to determine the extent
of the use of Federal funds for State programs for 2008 or 2009.
11
The Authority’s general ledger will require significant adjustment before the
amount of Federal funds used for State programs during 2008 or 2009 can be
verified. The failure to adequately account for funds occurred due to inadequate
financial controls, the lack of formal accounting procedures, and the lack of an
effective financial manager since February of 2008. Therefore, we could only
identify the improper use of Federal funds from the most recent audited financial
statements, which reported that $524,879 in Federal funds had been used for State
programs as of December 31, 2007.
The Authority Could Not
Support $105,000 in Payments
The Authority could not locate supporting documents for the payment of
$105,000 in Federal funds paid in lieu of taxes.9 Therefore, these payments were
unsupported. The Authority also signed an agreement with the City in September
2006, agreeing that it owed the City $500,000 for payments in lieu of taxes and
would make quarterly payments of $6,250 until the debt was paid. However, the
Authority did not maintain documentation to support how much of the $500,000
was owed by Federal programs and how much was owed by State programs.
The Authority Paid $97,106 for
Questionable Contract Costs
The Authority paid a contractor for painting, cleaning, and renovations that
exceeded the contract price and were not properly supported or reasonable. The
contractor routinely overcharged for contract-related work, submitting invoices
for hundreds of dollars above the allowable contract price, invoicing for the
wrong bedroom size, routinely charging for additional work without itemizing the
costs, and failing to detail the time spent or identify the materials used. This
abuse occurred because the former executive director did not take corrective
action when his staff informed him that the contractor was overcharging for work.
As a result, we identified $56,516 in unsupported costs and $40,590 in
unreasonable costs that must be repaid to the Federal programs.
9
For the period of January 1, 2006, through September 16, 2009. A payment in lieu of taxes made to compensate a
local government for some or all of the tax revenue that it loses because of the nature of the ownership or use of a
particular piece of real property. Usually it relates to the foregone property tax revenue.
12
The Authority Improperly Used
$99,939 in Capital Funds
The Authority improperly used $99,939 in Federal capital funds for security
patrols at its State housing projects. This noncompliance occurred because the
State did not have sufficient funds to pay for security patrols and the former
executive director disregarded the prohibition against using Federal funds for
State programs. This problem continued to occur because HUD did not review
the invoices supporting police reports, which clearly showed that patrols were
being conducted on State sites. Our review identified $84,624 in ineligible
payments made for State security patrols, $14,306 in unpaid invoices for security
patrols performed at State sites, and $1,009 in payments that were not supported
by a police report showing where the patrols were conducted.
Conclusion
HUD was not effective in recovering the Authority from its longstanding troubled
status. Despite additional monitoring and assistance over the past 10 years, the
Authority’s financial condition continued to deteriorate, and it improperly used
$721,924 in Federal funds. The Authority’s condition continued to decline due to
its poor management and HUD’s failure to take timely action to obtain effective
management for the Authority’s Federal programs. As a result, the condition of
the housing did not meet HUD’s minimum standards, creditors were not paid, and
the Authority continued to improperly use Federal funds. The Authority needs to
be formally reported to the Assistant Secretary for Public Housing for a
determination of the corrective actions required by HUD regulations and Federal
statutes.10
In addition, the Authority had exceeded the maximum statutory recovery period,
and our prior audit report, number 2009-BO-1010, issued August 7, 2009,
recommended that the Deputy Assistant Secretary for Field Operations inform the
Assistant Secretary for Public and Indian Housing of the Authority’s inability to
improve its score or meet the goals of its memorandum of agreement with HUD
and determine the statutory remedies required under section 6(j) of the U.S.
Housing Act of 1937. Therefore, the findings in this report should also be
considered when implementing that recommendation.
HUD should either declare the Authority in default of its contact with HUD or
pursue receivership. If HUD declares a substantial default, the agency will have
more time to remedy its problems. However, HUD must be committed to
expending more of its limited resources on this small housing authority. HUD
10
We made this recommendation in our related audit report, 2009-BO-1010.
13
may pursue receivership due to intentional violations of the contractual
requirements; the Authority’s failure to provide decent, safe, and sanitary housing
to tenants over an extended period; and the amount of resources HUD has already
committed to this agency.
Recommendations
We recommend that the Director of HUD’s Boston Office of Public Housing
require the Authority to
1A. Establish and implement a formal written short- and long-term
financial/business plan with measurable milestones to pay its creditors, avoid
having a local receivership lien placed against its rents, and/or remove the
lien.
1B. Establish and enter into a formal repayment agreement with the City to
repay past-due Federal water and sewer bills.
1C. Strengthen and implement controls over the tracking and reporting of
Federal public housing operating funds to ensure that the Authority is
using these funds for this Federal program only.
1D. Correct its revolving account balances and obtain an independent audit of
the balances to verify that the account balances are accurate.
1E. Determine the amount and repay the Federal programs for the amount of
ineligible Federal funds used for non-Federal programs, estimated to be at
least $524,879 at the end of 2007, and determine whether any Federal
funds were used for non-Federal programs during 2008 and 2009 and
repay these funds.
1F. Establish and implement accounting controls to ensure that payments in
lieu of taxes are properly accounted for and recorded on its books and
records.
1G. Support or repay $105,000 to its public housing operating fund for
unsupported Federal payments in lieu of taxes.
1H. Repay $40,590 to its public housing operating fund for unreasonable
contract maintenance costs.
1I. Support or repay $56,516 to its public housing operating fund for
unsupported contract maintenance costs.
14
1J. Support or repay the Public Housing Capital Fund $1,009 for unsupported
security patrol costs.
1K. Repay the Public Housing Capital Fund $84,624 for ineligible security
patrol costs.
1L. Implement controls to ensure that capital funds are used for Federal
projects only, thereby avoiding $14,306 in future payments already owed
for security patrols performed at State projects.
We also recommend that the Director of the Office of Field Operations
1M. Establish and implement a process by which the Deputy Assistant
Secretary of Field Operations can formally report troubled housing
agencies to the Assistant Secretary for Public Housing for a determination
of the corrective actions required by HUD regulations and Federal
statutes.
1N. Notify the Deputy Assistant Secretary for Public Housing that the
Authority’s rents are in danger of receivership.
We also recommend that the Director of the Departmental Enforcement Center
1O. Pursue all administrative and/or civil monetary penalties for the regulatory
and contract violations disclosed in this finding.11
11
In implementing this recommendation, the Deputy Director should consider all of the issues discussed in this
report and audit report 2009-BO-1010.
15
SCOPE AND METHODOLOGY
We conducted our audit between January and November 2009. We completed our fieldwork at our
office in Hartford, CT, and at the Authority’s offices located at 78 Walden Avenue, New London,
CT. Our audit covered the period January 1, 2006, through December 31, 2008, and was extended
when necessary to meet our audit objective.
To accomplish our audit objective, we
• Reviewed relevant HUD regulations, including
24 CFR (Code of Federal Regulations) Part 902 - Public Housing Assessment System,
Final Rule;
24 CFR Parts 968, 901, 902, and 907 - Proposed Rule;
42 U.S.C. (United States Code) 1437.6(j)(3) - The United States Housing Act of 1937;
and
The Authority’s annual contributions contract with HUD
• Interviewed and e-mailed key officials and staff including the Director of Field
Operations, the Director of the Boston Office Public Housing, the Corps’s Deputy
Director, and the Authority’s executive director(s) to determine what controls were in
place to monitor and assist the Authority and ensure compliance with 24 CFR Part 902
and 42 U.S.C. 1437.6(j).
• Reviewed the memorandums of agreement, corrective action plans, and HUD directives
for corrective action.
• Interviewed the Authority’s staff and reviewed supporting documentation to verify that
a. Federal funds were not used for other programs;
b. Operating funds used for painting, cleaning, and maintenance were in accordance
with the contract and properly supported; and
c. Capital funds used for security patrols were not used for State housing projects.
• Reviewed the Authority’s board minutes, accounting records, and supporting records to
verify its financial condition and the status of its accounts payable.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
16
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:
• Program operations,
• Relevance and reliability of information,
• Compliance with applicable laws and regulations, and
• Safeguarding of assets and resources.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objectives:
• Controls over identifying and monitoring deficiencies.
• Controls over taking corrective actions when the Authority did not recover
from troubled status.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
Significant Weaknesses
Based on our review, we believe that the following item is a significant weakness:
• Controls over identifying and monitoring deficiencies. HUD’s procedures
did not ensure that effective and timely action was taken when the Authority
failed to recover from troubled status within 2 years (see finding 1).
17
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
The total questioned cost of $826,924 consists of the following:
Recommendation Ineligible 1/ Unsupported 2/ Unreasonable or Funds to be put
number unnecessary 3/ to better use 4/
1E. $524,879
1G. $105,000
1H. $40,590
1I. $56,516
1J. $1,009
1K. $84,624
1L. $14,306
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or Federal, State, or local
policies or regulations.
2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of the audit. Unsupported
costs require a decision by HUD program officials. This decision, in addition to
obtaining supporting documentation, might involve a legal interpretation or clarification
of departmental policies and procedures.
3/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary,
prudent, relevant, and/or necessary within established practices. Unreasonable costs
exceed the costs that would be incurred by a prudent person in conducting a competitive
business.
4/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. These amounts include reductions in outlays, deobligation of funds,
withdrawal of interest, costs not incurred by implementing recommended improvements,
avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
that are specifically identified. For this report, these amounts include reductions in
outlays for security patrols conducted at State housing sites.
18
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
19
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 3
20
Ref to OIG Evaluation Auditee Comments
Comment 4
Comment 5
21
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 6
Comment 7
22
Ref to OIG Evaluation Auditee Comments
Comment 8
Comment 9
23
OIG Evaluation of Auditee Comments
Comment 1 The Authority’s deficiencies and mismanagement have been long known to HUD
and the community; thus, our audit focused on evaluating HUD’s effectiveness in
identifying and helping to correct them. We disagree that the report implicates
HUD as a contributor to the Authority’s failures and reported that “The Authority
has been troubled primarily due to the poor management of its Federal and State
housing programs."12 The report credits HUD for detecting significant
deficiencies and providing extensive assistance. Nonetheless, HUD’s assistance
was not effective or vigilant enough, and the Authority has remained in various
stages of troubled status for more than 10 years.
Further, although HUD did not contribute to the Authority’s problems, HUD is
responsible for oversight and compliance with Federal regulations that require the
Assistant Secretary for Public Housing to either issue a notice of substantial
default or petition for a receiver when agencies do not comply with their annual
contributions contracts and memorandums of agreement, fail to make substantial
progress toward remedying their troubled status, and fail to recover from troubled
status within the maximum recovery period. However, HUD has neither declared
the Authority in substantial default nor taken possession of any or all of the
Authority’s projects or programs or petitioned for the appointment of a receiver as
required by HUD regulations and Federal statute.
Comment 2 HUD does not have the authority or responsibility for oversight of the Authority’s
State programs; thus, our report did not and would not address recovery efforts for
State responsibilities in this area. HUD correctly identified the Authority’s State
programs as a drain on its resources. However, HUD did not take appropriate
action to safeguard Federal program funds when the Authority reported that it
used more than $224,000 in Federal funds for its State programs in 2006 and that
the amount had grown to more than $524,000 by the end of 2007. Had HUD
focused on protecting the Federal programs and proceeded to intervene at the end
of 2006 based on the misappropriated funds or replaced management in
December of 2007 as required by statute and regulation, the misappropriation of
Federal funds might have stopped. As a result, these funds would have been
available for Federal expenses, liens would not have placed against Federal
projects, and the Federal programs might not be facing potential receivership
through the State courts.
Comment 3 The report accurately states that HUD did not take the required action in a timely
manner. On December 12, 2007, HUD was required to either (1) declare the
Authority in substantial default and refer it the Departmental Enforcement Center,
as required by 24 CFR 902.79(a)(3), or (2) take possession of any or all of the
Authority’s projects or programs or initiate actions to appoint a receiver to assume
the responsibilities of the Secretary, as required by The United States Housing
12
See “What We Found.”
24
Act of 1937, 42 U.S.C. 1437.6(j)(3). Therefore, we considered HUD’s March 29,
2009, recommendation to be too late and that its alternative solution and
recommendation not to declare the Authority in substantial default or not to take
possession of any or all of the Authority’s projects or programs or pursue a
receivership was not in compliance with Federal regulations or the statute. HUD
did not fulfill its oversight responsibilities when it did not take appropriate action
to safeguard Federal program funds when the Authority repeatedly reported that it
used Federal funds for its State programs. HUD must either declare a substantial
default or a violation of 6(j). However, if HUD declares a substantial default, it
has unlimited time in which to rectify the default.
Comment 4 We disagree that an emergency situation arose in 2008 from the use of Federal
funds for State programs. The Authority’s 2006 and 2007 financial statements
clearly reported that hundreds of thousands in Federal project funds was used for
State programs. HUD did not fulfill its oversight responsibilities when it did not
take appropriate action to safeguard Federal program funds when the Authority
repeatedly reported that it used Federal funds for its State programs. We believe
that had HUD intervened in a timely manner, these funds would have been
available to pay Federal expenses, thus avoiding property liens and the potential
receivership of rents for nonpayment of utility expenses.
Comment 5 HUD’s alternative solution may have been effective had it been timely. However,
HUD did not take appropriate action to safeguard Federal program funds when
the Authority reported that it used more than $224,000 in Federal funds for its
State programs in 2006 and that the amount had grown to more than $524,000 by
the end of 2007. In addition, the failure to declare the Authority in substantial
default leaves the board of commissioners in place, thus risking continued
mismanagement and poor decision making that may lead to further
misappropriation of Federal program funds. Therefore, to fully protect the
Federal projects’ interests and comply with Federal regulations and statutes, we
recommend that HUD either declare the Authority in substantial default of its
annual contributions contract and take actions available to the Secretary under 24
CFR Part 902 or take possession of any or all of the Authority’s projects or
programs or pursue receivership under 42 U.S.C. 1437.6(j)(3).
Comment 6 HUD’s statement that “Any HUD intervention would have disrupted the
partnership between the NLHA [Authority] and the developer partner” is
speculative and, thus, cannot be confirmed. The State redevelopment project has
proceeded since HUD intervened in March of 2009 and convinced the Authority
to begin the process of contracting out the management of its Federal and State
programs. Thus, we could find no credible evidence to support HUD’s
justification for not intervening and taking action.
Comment 7 We did not remove or revise our discussion of unpaid utility bills because as HUD
conceded, they were not paid and the Authority’s books and records showed that
its accounts payable to the utility company totaled $818,716 as of September 9,
25
2009. HUD is correct to note that the actual amount credited to the Authority’s
Federal utility accounts by the utility company differs from the Authority’s books
and records and, thus, must be reconciled before the actual amount can be
determined. Therefore, this reconciliation should be completed as part of
recommendation 1A.
Comment 8 The Authority revised the estimated proceeds from the redevelopment of its State
projects from $2.1 million to $3.1 million. Thus, we updated the report to reflect
the higher expected proceeds. However, during the audit, neither HUD nor the
Authority had a written plan or budget to show how the Authority would manage
and meet its long-term and short-term obligations. In addition, we did not
consider the statements in HUD’s response to be adequate or accurate. First,
HUD acknowledged that it did not know the full extent of the Federal programs’
liabilities. Also, HUD’s statement that the Authority expects to receive $3.2
million sometime in the spring of 2010 is not accurate. Documents provided by
the Authority’s attorney showed that the Authority expects to receive only $1.3
million in the spring of 2010 (see the complete schedule below). In addition, the
State redevelopments and proceeds are contingent on State bonding, which,
although approved by the Connecticut Housing Finance Authority, has not been
passed in the State budget and, thus, is not assured at this time. Thus, our report
and recommendation 1A remain unchanged and recommend that HUD establish
and implement a formal written short- and long-term financial/business plan with
measurable milestones to pay its Federal creditors, remove liens, and avoid
receivership of rents for nonpayment of utilities.
4/1/2010 - $1,394,000
1/1/2011 - $1,226,000
9/1/2011 - $324,000
1/1/2014 - $216.000
Total $3,160,000
Comment 9 OIG did not and would not recreate the Authority’s books and records during an
audit. We based our conclusions on the Authority’s existing books and records as
verified by the supporting source documents and independently audited financial
statements.
HUD provides operating funds for payments in lieu of taxes to reimburse cities
for the substantial cost of providing services to tenants and their children. Thus,
payments in lieu of taxes [PILOT] expenses are valid expenses that must be paid.
Further, with no signed agreement to show that the payments were forgiven, we
considered it unreasonable to suggest that the Authority should not have agreed to
pay past-due PILOT payments and should have shifted the burden to the
taxpayers of New London for the full cost of services provided for these tenants.
26
Appendix C
AUTHORITY PHAS SCORES
______________________________________
Authority
PHAS status
REAC* PHAS
Fiscal Status/ notification Total
year designation date PASS** FASS*** MASS**** RASS***** PHAS
1998 Advisory 10/16/2000 18 18 18 10 64
1999 Advisory 4/4/2001 15 3 17 9 44
2000 Advisory 12/31/2001 11 11 25 4 48
2001 Substd financial 1/16/2004 28 11 26 9 74
2002 Substd financial 8/28/2003 28 0 25 8 61
2003 Overall troubled 5/26/2004 14 2 13 8 37
2004 Overall troubled 7/12/2005 24 0 20 9 53
2005 Overall troubled 6/17/2006 22 0 22 6 50
2006 Overall troubled 14 0 20 6 40
2007 Overall troubled 21 0 27 4 52
2008 Suspended
* REAC = Real Estate Assessment Center
** PASS = Physical Assessment SubSystem
*** FASS = Financial Assessment SubSystem
**** MASS = Management Assessment SubSystem
***** RASS = Resident Assessment SubSystem
Authority
SEMAP* (Section 8) status
Fiscal Status/
year designation Total score
2000 Troubled 12
2001 Troubled 28
2002 Troubled 4
2003 Troubled 58
2004 Standard performer 81
2005 Troubled 15
2006 Troubled 26
2007 Standard performer 89
2008 High performer 100
* SEMAP = Section Eight Management Assessment Program
Note - Yellow highlights indicate failing PHAS scores
27